I’ve been named executor, what do I need to know for taxes?

Lucy has been named the executor (also referred to as estate trustee) in her aunt’s will. Her aunt passed away November 5, 2016. Lucy calls me in February to find out what she needs to do and we have the following conversation:

Lucy: I heard that the executor has six months to file the final tax return, is that right?

Viviane: It depends on the date of death. When a death occurs from January 1 to October 31, the due date is April 30th of the following year. If a death occurs from November 1 to December 31, the due date is six months after date of death. So, in your case, the final return for your aunt is due May 5, 2017. For deceased taxpayers that were self-employed, the filing dates are different.

Lucy: The will is in the process of being probated. Do I wait to file the final return until I receive probate?

Viviane: The final return should be filed by the due date. In some cases, you cannot obtain the information you need from the financial institutions or life insurance companies until the probate process is complete. You should make a reasonable estimate of the missing information, file the return on time, and then file an adjustment request once you have the actual figures.

Lucy: What is reported on the final return, and what information would you need other than the tax slips that have been issued? My aunt had her home she was living in, a small government pension, Canada Pension Plan and Old Age Security benefits, payments from a registered retirement income fund, a tax-free savings account and some shares in a publicly traded company.

Viviane: The final return will report your aunt’s income from January 1, 2016 to November 5, 2016 (the date of death). For the pension, CPP, OAS and RRIF payments, you will receive tax slips that should reflect the amounts received to date of death.

When a person dies, for tax purposes they are deemed to dispose of all their assets at fair market value. For the RRIF, the bank will issue a 2016 tax slip showing the fair market value of the RRIF at date of death. If you cannot obtain that tax slip before the return is due, you can estimate the fair value using a statement from the bank around the date of death.

For the tax-free savings account, generally, all income earned in the TFSA is tax free to date of death, and there is no deemed disposition since the contributions were never tax deductible.

For the public company shares, these are deemed to be disposed of at date of death, so you need to obtain the fair market value at date of death and the adjusted cost base.

Lucy: OK, I understand the RRIF and the TFSA, but how do find out the information about the company shares, and what does “adjusted cost base” mean?

Viviane: The market value of the shares can often be obtained from the company’s website, or if the shares were being held in an investment account, your aunt’s investment advisor could obtain that information for you. Adjusted cost base is the original purchase price of the shares plus additional purchases plus dividend reinvestments if any. The bank may have that information. However, if your aunt held those shares for many years, and the original statements are not available you may need to estimate the adjusted cost base.

Lucy: Wow! This is more involved than I thought it would be! What about her home, is that deemed to be disposed at fair market value?

Viviane: Yes, that’s right. However, if your aunt had never designated any other property as her principal residence while she owned her home, then the home should be fully eligible for the principal residence exemption if all other criteria are met. However, there are new rules that require that the disposition of the home, whether deemed or actual, be reported on the return even if the home is fully exempt from any taxable gains. So, you will need to know the fair value of the home at date of death and the date it was purchased.

Lucy: I applied for the CPP death benefit and received it last week. Is that $2,500 CPP death benefit reported on the final return?

Viviane: No, the CPP death benefit is either reported by the residual beneficiaries named in the will or it goes on a separate tax return, called a T3 Trust Income Tax and Information Return. Any other income that is earned after date of death is also reported by either the beneficiaries or reported on the T3 Trust Return.

Lucy: What is the due date of the trust return, and how is the income taxed?

Viviane: for the trust return, a taxation year end must be selected for the estate. It can be one year from date of death or any time before that date. In this case, the trust year end could be November 5, 2017 or any time between November 6, 2016 and November 5, 2017. The trust return is due 90 days after the year end.

Generally, for the first three years after date of death, the estate will be designated as a “graduated rate estate”. This means that the tax rates will be graduated just as they are for personal income tax returns. There are no personal tax credits on a trust return. Income in the first tax bracket will be taxed at 20.05%.

Lucy: OK, I’ll gather the information for you to complete the tax returns. What other information do you need?

Viviane: On my website, under Resources & Tools, Estate Taxes, you will find an estate trustee checklist and information sheet. Take a look at these documents, and if you have any questions before we meet, let me know. Canada Revenue Agency also has a guide, T4011 about deceased taxpayers and guide T4013 about trust returns.

Lucy: Thank you Viviane!

For any forms mentioned in this blog, go to CRA website (www.cra.gc.ca) and type the form name in the search box